Why we shouldn’t worry about wealth inequality in Canada

Age and accumulated wealth account for much of the discrepancy. And that's just normal life-cycle economics

Much ado about nothing. The title of the Shakespearean comedy comes to mind when I think about the attention devoted to wealth inequality in recent years.

The left’s (and much of the major media’s) preoccupation with economic inequality is fundamentally misplaced and has diverted attention away from the real problems we face.

For example, take a look at the latest study from the Organization for Economic Co-operation and Development (OECD) comparing household wealth inequalities among member countries.

A Globe and Mail article entitled “Unequal partners: A breakdown of how many hold how much of Canada’s wealth” reviews the OECD paper uncritically and simply parrots the study’s main points. This is regrettable. The Globe missed an opportunity to enlighten its readership about an important issue.

Wealth is defined as “net worth” and is essentially a household’s assets minus its liabilities. Let’s look at the evidence of household wealth inequality from the OECD study. It shows that among member countries (mainly western Europe, North America, Japan, Korea, Australia and New Zealand), the top 10 per cent of households own about 50 per cent of the wealth and the bottom 40 per cent own almost nothing (the average is below five per cent).

The United States has the most unequal distribution of wealth among member countries, followed closely by the ‘egalitarian’ countries of northern Europe: Denmark, Norway and the Netherlands. It’s notable that Sweden, an OECD country, is missing from the survey. However, other surveys show that Sweden also has a high level of wealth inequality similar to other Nordic countries. Indeed, in each of those three countries, the bottom 40 per cent actually has negative wealth – they owe more than their assets.

How can the bottom 40 per cent of households in any country, let alone the Scandinavian paradises, have no wealth at all?

Well, it’s easy to explain this pattern of wealth inequality: Age.

Almost everyone in every society goes through a pretty predictable life cycle as they move from their student years through to their work life and then on to retirement. Age is the dominant explanation for differentials in wealth. The 25-year-old starting his first job with no wealth (likely negative wealth if they have some student debt) will have substantial wealth 40 years later after a lifetime of accumulation (savings accounts, home equity, financial assets and debt repayment). Most people start their working lives in the bottom quintile or decile of wealth and end up in a top grouping around retirement age.

My own study of wealth inequality in Canada uses Statistics Canada data on household wealth and confirms this age pattern. Based on survey data from 2012, the net worth of the youngest grouping was only about $55,000; for the people around retirement age, average net worth was almost $1 million. My analysis of this pattern showed that between 80 and 87 per cent of Canadian wealth inequality is due to age (the life-cycle effect). This is entirely predictable for society as a whole, despite the fact that a small number of people have difficulties in life and do not follow the usual pattern.

With the recent OECD study, the larger negative values among the bottom 40 per cent in some northern European countries is due to higher home prices in recent years and because younger families are consequently carrying a heavier debt burden. The authors mention age as a factor but the explanation is buried in a small paragraph in the middle of the 69-page report. They state that “Levels of net wealth are strongly linked to people’s life cycle, as wealth is built up over the course of working life and then reduced in retirement.”

That’s it! The explanation is lost in the plethora of attention given to the statistics on wealth inequality. And, of course, the explanation is entirely absent in the Globe and Mail commentary on the study.

Wealth inequality?

Much ado about nothing.

Chris Sarlo is a professor of economics at Nipissing University in Ontario and author of Understanding Wealth Inequality in Canada published in 2017 by the Fraser Institute.